Israeli President Shimon Peres told new Prime Minister Benjamin Netanyahu on Wednesday that the world backed the Palestinian quest for a state, a goal the incoming right-wing leader has not endorsed.

"The government you lead must make a supreme effort to move the peace process forward on all fronts," Peres said at the state ceremony at which former prime minister Ehud Olmert handed over formally to Netanyahu, who was sworn in on Tuesday.

"The outgoing government adopted the vision of two states for two peoples, promoted by the U.S. administration and accepted by a majority of countries in the world," Peres said. "Your government must determine the shape of the coming reality," he said, stopping short of an explicit call for Netanyahu to declare support for the creation of a Palestinian state alongside Israel.

Peres, a former centre-left prime minister whose current post is largely ceremonial, also cited the Arab peace initiative for the Middle East. That proposal offers Israel normal relations with the Arab world in return for a Palestinian state and full withdrawal from land Israel seized in a 1967 war.

"I know of no better alternative than peace for the entire region, especially since the Arab need for peace is conjoined with the Iranian threat to take over the Arab part of our region," Peres said. Netanyahu has also highlighted misgivings among Arab leaders about the power of non-Arab Iran.

Asked by reporters about Peres's comments on a Palestinian state and the Arab peace initiative, Netanyahu was non-committal. "I listened seriously and am guided by a sense of responsibility and the need for unity," he said.

In a traditional step by an incoming Israeli prime minister, Netanyahu, accompanied by his wife and two teenaged sons, later visited Jerusalem's Western Wall, one of Judaism's holiest sites. He placed a hand-written prayer in a crevice.

"We will protect it," he told the rabbi in charge of the wall, which lies inside Jerusalem's Old City. The city, captured by Israel in 1967, houses sites holy to Jews, Muslims and Christians.

Israel regards all of Jerusalem as its capital and Netanyahu has pledged never to relinquish control of it. Palestinians want Jerusalem to be the capital of the state they hope to establish in the West Bank and Gaza Strip.

In a policy speech in parliament on Tuesday, Netanyahu said he would negotiate peace with the Palestinians, but made no explicit mention of a state, a concept at the foundation of talks sponsored by the United States but currently suspended.

Netanyahu told the legislature, which later ratified his right-leaning government, he wanted the Palestinians to have sufficient authority to govern their own lives but not in a way that would threaten Israel's security.

Palestinian President Mahmoud Abbas, responding to Netanyahu, said on Palestine Television: This man doesn't believe in peace so how can we deal with him?" The world, Abbas said, "should tell Israel it should accept a two-state solution".

At the handover ceremony at Peres's official residence, Netanyahu did not speak about government policy other than to say: "We will have to roll up our sleeves and get to work."

Peres attracted attention late last year by praising the Arab peace initiative, first proposed by Saudi Arabia in 2002.

Israeli officials have suggested Netanyahu may give the head of state a role in regional diplomacy, partly to offset the fact that far-right leader Avigdor Lieberman is now foreign minister.